On December 13, 2022, the U.S. Securities and Exchange Commission (SEC or Commission) filed civil securities fraud charges against Samuel Bankman-Fried, the co-founder and former CEO of collapsed cryptocurrency exchange FTX Trading Ltd. (d/b/a FTX.com) (FTX). In its Complaint, filed in the U.S. District Court for the Southern District of New York, the SEC alleges that Bankman-Fried engaged in a scheme to defraud FTX equity investors – including U.S. equity investors – out of more than $1.8 billion. According to the Commission, “Bankman-Fried was orchestrating a massive, years-long fraud, diverting billions of dollars of the trading platform’s customer funds for his own personal benefit and to help grow his crypto empire.” The Complaint’s filing coincided with an eight-count federal indictment and Bankman-Fried’s subsequent arrest in the Bahamas.  

Bankman-Fried, age 30, was the co-founder, majority owner, and, prior to stepping down on November 11, 2022, the CEO of Bahamas-based FTX. He was also the co-founder and majority owner of Alameda Research LLC (Alameda), a closely related entity operating as a crypto hedge fund. Bankman-Fried was the CEO of Alameda until being succeeded by Caroline Ellison in 2022. Bankman-Fried was also the co-founder of FTX US, the d/b/a for a subsidiary of West Realm Shires Services Inc. (FTX US), a crypto asset trading platform designed primarily for U.S. customers. (FTX US is not the subject of the Complaint’s allegations.) On November 11, 2022, FTX, Alameda, FTX US, and more than 100 additional affiliated companies filed for Chapter 11 bankruptcy.

According to SEC Chair Gary Gensler and Division of Enforcement Director, Gurbir Grewal, Bankman-Fried promoted FTX as a safe and responsible crypto asset trading platform, all the while having built “a house of cards on a foundation of deception” and operating “behind a veneer of legitimacy.” Specifically, the alleged fraudulent behavior relates to Bankman-Fried’s failure to disclose (1) the diversion of FTX customer funds to Alameda, (2) the special treatment afforded to Alameda, including a virtually unlimited “line of credit” funded by FTX’s customers, and (3) the risks stemming from FTX’s exposure to Alameda’s significant holdings in overvalued, illiquid assets including FTX-affiliated tokens. The SEC further notes in its Complaint that “there was no meaningful distinction between FTX customer funds and Alameda’s own funds,” and that Bankman-Fried allegedly “used Alameda as his personal piggy bank to buy luxury condominiums, support political campaigns, and make private investments, among other uses.” None of these activities were disclosed to FTX’s equity investors.

The Complaint charges Bankman-Fried with violating the anti-fraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. The SEC seeks several remedies including injunctive relief, disgorgement, and civil penalties.

The attorneys at Giarrusso Law Group LLC have considerable experience with issues unique to the financial services industry, including recent trends and developments in federal and state enforcement matters. If you have a question about this announcement or any other industry matter, you can contact us at (201) 771-1115 or info@gialawgroup.com for a free and confidential consultation.